Transparency and Opacity in Environmental Grandfathering

Jonathan R. Nash

Résumé

Regulatory schemes designed to further sustainable development – whether through pollution control or natural resources preservation – often employ grandfathering, that is, granting legal rights based on activity that predates the regulatory regime. Transparency in the context of grandfathering must be nuanced. Government should be transparent about incentives to engage in environmentally valuable behavior, but government should not be transparent to the extent that grandfathering relies on prior behavior that is detrimental to the environment and sustainable development. 

Consider first grandfathering based upon prior behavior that is environmentally detrimental – for example, allocating fishing quotas based upon prior years’ catches. When a government wishes to distribute grandfathering rights to societal actors who currently engage in a behavior that will soon be restricted, the societal actors may engage in inefficient behavior to secure additional property rights. Such behavior may artificially increase pollution emissions, prematurely and inefficiently deplete natural resources, or both. To minimize the undesirable incentive, the government may employ a “retrospective allocation” based on activities that predate the limitations on resource access. Legal uncertainty makes it more difficult for societal actors to modify their behavior. Such systems have become increasingly common in the context of environmental and natural resource regulation.  
Over time, societal actors likely will come to expect retrospective allocation, and act in anticipation by engaging in the behaviors on which they predict the allocations will be based. In order to combat this gaming of the system, the criteria for winning allocations must change over time for retrospective allocation to maintain effectiveness on an ongoing basis. In other words, too much transparency in this context leads to inefficient behavioral distortions and poor environmental consequences; opacity serves to ameliorate these outcomes.

In contrast, consider grandfathering of rewards for positive behavior – for example, awarding credits to societal actors who voluntarily reduce pollution emissions before a regulatory regime requires such reductions, or who make factories fuel-efficient before increased fuel efficiency is required. Whereas distortions by actors in attempts to garner more grandfathering rights by engaging in environmentally detrimental behavior is undesirable and should be discouraged by relying on some measure of opacity, environmentally desirable behavior should be encouraged via transparency. Assuming the government has decided upon behaviors it would like societal actors to undertake, the government should announce those behaviors and be transparent about its desire to provide positive benefits in the future. Such transparency will “lock the government in” and create greater incentives for societal actors to engage in the desired behaviors early in time, thus providing environmental benefits even before a regulatory regime is enacted and become binding.

Before proceeding, I believe it important to identify an important caveat to the arguments I discuss here. I do not mean here to endorse grandfathering as normatively desirable. As I discuss below, legal and economic commentators have criticized grandfathering as a form of “transition relief” that is, relief from a transition in legal rule. These commentators argue that grandfathering inefficiently discourages actors from anticipating legal changes; they assert that it would be more efficient to subject all societal actors immediately to new legal regimes. While (as I also discuss below) there are arguments in support of limited grandfathering under limited circumstances, the arguments I make here have application so long as whatever the reason, and whether or not it is normatively desirable grandfathering continues to play a prominent role in environmental regulation.

The balance of this chapter is organized as follows. Section 1 provides an overview of the role of grandfathering in environmental regulation. Section 2 explains how opacity should figure prominently in the government’s allocation of grandfathered rights on the basis of environmentally undesirable behavior. Section 3 discusses how, in contrast, the government should be transparent in identifying desirable behavior that it will reward with grandfathered rights. Section 5 concludes.

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